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An International Economy with Country-Specific Money and Productivity Growth Processes

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  • Nicholas Ricketts
  • Thomas H. McCurdy

Abstract

This paper analyses a stochastic international growth model with money and country-specific forcing processes for productivity and money growth rates. Monies are required due to cash-in-advance constraints for consumption goods but the liquidity constraints need not be binding for all periods. An individual can trade claims on future currency units for both countries through government bond markets. Each country specializes in the production of one of the goods but individual agents can invest, subject to installation costs, in any available technology. Two versions of the model are simulated in order to compare different degrees of international mobility of physical capital. The moments of the forcing processes are calibrated to a sample of U.S. and Canadian data. A perfectly pooled equilibrium solution is computed numerically, using the Marcet method of parameterized expectations and the moments of the endogenous variables are compared to those for the actual data. The interdependence implied by the model is illustrated by a series of impulse responses. Particular attention is focused on the implications of capital mobility, the asymmetry of the forcing processes across countries, the implications of the liquidity constraints, and the interaction between the real and nominal components of the model. For example, with endogenous production, we find that monetary fluctuations cause business cycle behavior in consumption and investment while the effect on goods and asset prices can be substantially different from that in endowment models. We also find that the effects of monetary policy are transmitted to other countries via exchange rate and terms of trade adjustments.

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File URL: http://qed.econ.queensu.ca/working_papers/papers/qed_wp_846.pdf
File Function: First version 1991
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Bibliographic Info

Paper provided by Queen's University, Department of Economics in its series Working Papers with number 846.

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Date of creation: Oct 1991
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Handle: RePEc:qed:wpaper:846

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Cited by:
  1. Albert Marcet & David A. Marshall, 1994. "Solving nonlinear rational expectations models by parameterized expectations: convergence to stationary solutions," Working Paper Series, Macroeconomic Issues 94-20, Federal Reserve Bank of Chicago.
  2. Bruno, C., 1997. "International capital movements and the locomotive effect," Economics Letters, Elsevier, vol. 56(3), pages 311-316, November.
  3. Kollmann, Robert, 1996. "Incomplete asset markets and the cross-country consumption correlation puzzle," Journal of Economic Dynamics and Control, Elsevier, vol. 20(5), pages 945-961, May.
  4. Lawrence J. Christiano & Jonas D.M. Fisher, 1997. "Algorithms for solving dynamic models with occasionally binding constraints," Working Paper 9711, Federal Reserve Bank of Cleveland.
  5. Kollmann, R., 1992. "Consumption, Real Exchange Rates and the Structure of International Asset Markets," Cahiers de recherche 9232, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
  6. Ambler, Steve & Cardia, Emanuela, 1995. "Les modèles réels de la transmission internationale du cycle économique," L'Actualité Economique, Société Canadienne de Science Economique, vol. 71(2), pages 193-217, juin.

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